Bitcoin Mt. Gox Exchange Disappears

When reading about the Mt. Gox debacle today, it reminded me of an eponymously
named character from the Dr. Seuss book, One Fish Two Fish Red Fish Blue Fish.
The publication was a rhyming book helping young readers through the observations
of a boy and girl and the world of oddities around them. One such oddity was
the Gox who was a bear-like creature wearing yellow boxing gloves and boxing
with the narrator.

I like to box.
How I like to box!
So, every day, I box a Gox.
In yellow socks, I box my Gox.
I box in yellow Gox box socks.

One of the oddities I noticed in the world of investing was the Bitcoin phenomenon,
which I dare say has all the characteristics of a speculative bubble. The investing
community was trying to box with a currency by turning it into a speculative
vehicle. That is not the function of a currency, in this case a cyber version.
Bitcoin emerged as an alternative currency to fight the declining "value" of
the U.S. Dollar (USD). Clearly there has been a devaluation of the USD particularly
since the inception of the Federal Reserve. This devaluation occurred through
the increasing volume of USD created. Most of these USD were not created with
the green pieces of paper in our wallets but rather in banking cyberspace.
Without adequate controls for currency creation, the banking system and the
Fed, and governments were free to expand the supply of USD to the point where
inflation became an accepted part of life.

Recognizing this shortcoming, alternative currencies such as such as Bitcoin,
Ripple, Litecoin, Peercoin, and Namecoin emerged. Of this group, Bitcoin was
by far the one with the most notoriety. Bitcoin was to solve one of the main
problems with fiat currencies (something that has value because an authority
decrees it) like the USD by making the creation of each Bitcoin unit more difficult
than simply generating accounting entries in banking cyberspace. There was
also the feature of anonymity that made it behave more like cash notes in that
regard. Another feature of Bitcoin was something known as the block chain,
which is a database showing every transaction executed and its value at any
point in its history. So as far as addressing some of the problems with fiat
currencies, Bitcoin hit several key spots.

If the story ended there, I might not be publishing this article. Instead,
Bitcoin became a vehicle for speculation. Rather than operating as a medium
of exchange, a store of value and a unit of account (definition of money in E$caping
Oz book), the public began to bid up its "value". I use "value" in quotation
since this comparison was relative to the USD. A totally new currency would
establish its value not relative to the other fiat currencies like the USD
but relative to goods and services. For example, a Bitcoin user would price
100 lbs of meat at "x" Bitcoins. A laundry facility would charge "x" Bitcoins
for cleaning 10 shirts, and so on. Now there are some businesses accepting
Bitcoin as a medium of exchange but you can bet the price in Bitcoins would
bear a strong relationship to the USD. This is not totally unexpected since
it would take time for a currency to gain traction and potentially displace
another.

Over the course of the last couple of years, the USD price of Bitcoins jumped
above $1,100 on the various trading exchanges. A spectacular run from $200
to the $1,100+ price occurred in one month alone before falling in value by
50% in December 2013. Speculators started investing in more powerful computational
devices in order to create more Bitcoins. This alone spoke to a bubble condition.
Another contrary sentiment indicator I like to use is that when Joe Q. Public
begins to extol the virtues of an investment, it is nearing a high in value.
Such sentiment was expressed to me by friends and family alike.

Rather than being a true medium of exchange, something that takes the place
of barter, Bitcoin turned into a Gox. The public tried to fight (box) something
that should have been accepted for what it was. For the people creating the
Bitcoin exchange known as Mt. Gox, I don't think they had the Seuss character
in mind when they named the online exchange. Maybe Gox to them meant gaseous
oxygen. In urban slang terms, to "gox" means to wait until the last minute,
particularly if done repeatedly. I guess you can say investors "goxed" themselves
by waiting too long to cash in their speculative gains on the Bitcoin exchange.
Alas, this is symptomatic of speculative bubbles.

In closing, I would like to suggest that ignoring the success of alternative
cyber currencies would be a mistake. These alternative mediums of exchange
are not going away. In fact, I would expect them to continue to flourish particularly
when credit conditions tighten once again. For all its faults, the USD remains
the reserve currency of the world. More importantly, there is no other currency
of which I am aware that can be exchanged for a fixed amount of precious metal.
In other words, every other legal tender (fiat) currency in existence is subject
to the same faults as the USD. Governments are not eager to change this since
doing so would place more discipline on their spending. Hopefully the adverse
experiencing of boxing the Gox, won't deter sound money from emerging again.